Three reasons Asia’s economies could grow faster than expected

Despite already beating economic growth expectations in 2017, Asia’s economies are set to see another year of faster growth, consultancy Deloitte said in a note last week. It cited three key drivers: improving domestic conditions, a strong infrastructure pipeline and global demand’s continued recovery.

Domestic drivers

“In much of the region, recent major policy reforms, like the introduction of goods and services taxes and the removal of fuel and other subsidies, hurt consumer confidence and had short-term negative implications for business,” Deloitte said. “But that effect is wearing off, as are the effects of India’s demonetisation, driving a pick-up in domestic demand in the form of consumption and external demand in the form of trade.”

It noted also that many countries took steps to improve the business climate, opening up to more investment.

Infrastructure pipeline

Several countries are set for “ambitious” infrastructure building plans, which will support near-term activity, Deloitte said.

“The largest infrastructure effort in the region is China’s ‘Belt and Road Initiative,’ which aims to boost productivity and efficiency gains in Asia by improving trade links between Asia and Europe,” Sitao Xu, Deloitte China economist, said in the note. “Even though it’s in the early stages, a number of infrastructure deals have already been signed under the initiative.”

In the short term, he expects the initiative will create jobs and investment opportunities around the region, while in the long term, it will improve movement of trade and business productivity.

Global demand recovery

Additionally, Deloitte pointed to “encouraging” signs of a capital spending recovery globally, which it said suggested the global economy will likely accelerate.

“Asian exporting economies stand to be the biggest beneficiaries of this recovery as demand for their manufactured goods grow with increased capital spending in developed economies,” Deloitte said.

Some potential speed bumps

But Deloitte noted there were some potential obstacles to its optimistic outlook.

“At the top of our list of challenges is the build-up of debt from the post-2008 financial crisis period of excess global liquidity,” Stephen Smith, an economist with Deloitte Australia, said in the note. “In some instances, this debt has been channeled into housing markets,
raising concerns of asset price bubbles.”

Smith also expressed concern about “financial imbalances” in China, which could worsen, although he added that’s not his baseline scenario.

“Our baseline scenario is for China to continue its impressive economic performance,” he said.

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